1.5 Review and Practice
Summary
Economists study the choices that people make—choices that are forced on us by scarcity. Scarce goods are those for which the choice of one alternative requires giving up another. The opportunity cost of any choice is the value of the best alternative forgone in making that choice.
Some key choices assessed by economists include what to produce, how to produce it, and for whom it should be produced. Economics is distinguished from other academic disciplines that also study choices by its emphasis on the central importance of opportunity costs in evaluating choices, the assumption of optimizing behavior that serves the interests of individual decision makers, and its focus on evaluating choices at the margin.
Economic analyses may be aimed at explaining individual choice or choices in an individual market; such investigations are largely the focus of microeconomics. The analysis of the impact of those individual choices on such aggregates as total output, the level of employment, and the price level is the concern of macroeconomics.
Working within the framework of the scientific method, economists formulate hypotheses and then test them. These tests can only refute a hypothesis; hypotheses in science cannot be proved. A hypothesis that has been widely tested often comes to be regarded as a theory; one that has won virtually universal acceptance is a law. Because of the complexity of the real world, economists rely on models that rest on a series of simplifying assumptions. The models are used to generate hypotheses about the economy that can be tested using real-world data.
Statements of fact and hypotheses are positive statements. Normative statements, unlike positive statements, cannot be tested, and they provide a source for potential disagreement.
Concept Problems
Why does the fact that something is scarce require that we make choices?
Does the fact that something is abundant mean it is not scarce in the economic sense? Why or why not?
In some countries, such as Cuba and North Korea, the government makes most of the decisions about what will be produced, how it will be produced, and for whom. Does the fact that these choices are made by the government eliminate scarcity in these countries? Why or why not?
Explain what is meant by the opportunity cost of a choice.
(Related to “Try It!” in Section 1.2.) What is the approximate dollar cost of the tuition and other fees associated with the economics course you are taking? Does this dollar cost fully reflect the opportunity cost to you of taking the course?
Indicate whether each of the following is a topic of microeconomics or macroeconomics:
The impact of higher oil prices on the production of steel
The increased demand in the last 15 years for exotic dietary supplements
The surge in aggregate economic activity that hit much of Asia late in the early 2000s
The sharp increases in U.S. employment and total output that occurred between 2003 and 2007
The impact of preservation of wilderness areas on the logging industry and on the price of lumber
Determine whether each of the following raises a “what,” “how,” or “for whom” issue. Are the statements normative or positive?
A requirement that aluminum used in cars be made from recycled materials will raise the price of automobiles.
The federal government does not spend enough for children.
An increase in police resources provided to the inner city will lower the crime rate.
Automation destroys jobs.
Efforts to improve the environment tend to reduce production and employment.
Japanese firms should be more willing to hire additional workers when production rises and to lay off workers when production falls.
Access to health care should not be limited by income.
(Related to “Case in Point: Opportunity Cost with The Simpsons ” in Section 1.3.) Your time is a scarce resource. What if the quantity of time were increased, say to 48 hours per day, and everyone still lived as many days as before? Would time still be scarce?
Most college students are under age 25. Give two explanations for this—one based on the benefits people of different ages are likely to receive from higher education and one based on the opportunity costs of a college education to students of different ages.
(Related to “Try It!” in Section 1.3.) Some municipal water companies charge customers a flat fee each month, regardless of the amount of water they consume. Others meter water use and charge according to the quantity of water customers use. Compare the way the two systems affect the cost of water use at the margin.
How might you test each of the following hypotheses? Suggest some problems that might arise in each test due to the ceteris paribus (all-other-things-unchanged) problem and the fallacy of false cause.
Reducing the quantity of heroin available will increase total spending on heroin and increase the crime rate.
Higher incomes make people happier.
Higher incomes make people live longer.
Many models in physics and in chemistry assume the existence of a perfect vacuum (that is, a space entirely empty of matter). Yet we know that a perfect vacuum cannot exist. Are such models valid? Why are models based on assumptions that are essentially incorrect?
Suppose you were asked to test the proposition that publishing students’ teacher evaluations causes grade inflation. What evidence might you want to consider? How would the inability to carry out controlled experiments make your analysis more difficult?
(Related to “Case in Point: Does Baldness Cause Heart Disease?” in Section 1.4.) Explain the possible fallacy of false cause in concluding that baldness makes a person more likely to have heart disease.
(Related to “Case in Point: The Opportunity Cost of COVID-19” in Section 1.2.) In early 2021, several European countries removed access to the Oxford-Astra Zeneca COVID-19 vaccine because of worries that it might be linked to an increased risk of blood clots. Explain the tradeoff regulators faced.
(Related to “Case in Point: The Opportunity Cost of COVID-19” in Section 1.2.) In late 2020, the U.S. began its long COVID-19 vaccine rollout. Each state developed its own plan, and had to prioritize access to the scarce vaccine. Discuss the tradeoffs, costs, and benefits inherent in these two options:
Begin the vaccination program by providing vaccine to the elderly, who are most vulnerable.
Begin the vaccination program by providing vaccine to the young, who are the most likely to spread the disease to others.
(Related to “Try It!” in Section 1.4.) Doctors have noticed that in any month, sales of ice cream are positively related to the number of drownings. “Didn’t your mother tell you to wait 30 minutes after eating before you jump in the pool?” Explain the nature of causation in this observation.